ECB’s Lagarde: ‘Our Commitment to the Euro Has No Limits’

7 February 2021

By David Barwick – FRANKFURT (Econostream) – The European Central Bank’s commitment to the common currency is without limits, ECB President Christine Lagarde said Sunday.

In an interview with French weekly Le Journal du Dimanche, a text of which was posted to the ECB’s website, Lagarde expressed her confidence that the economic recovery would take off this year despite uncertainties.

‘As I have been saying since March 2020, our commitment to the euro has no limits’, she said. ‘We will act for as long as the pandemic is causing a crisis situation in the euro area.’

‘We think that the time horizon of March 2022 is reasonable and that the PEPP envelope is appropriate’, she continued. The principle of flexibility means that if the ECB needs to do more for longer it will, just as it can also refrain from using all funds allotted to the PEPP, she said.

2021 ‘will be a recovery year’, with the upswing to ‘gather pace around the middle of the year, even if the uncertainties persist’, she said. Still, despite growth this year of close to 4% or ‘[m]aybe a little lower’, output levels seen before the pandemic would not be seen again before the middle of next year, she said.

‘Everything will depend on the vaccination policies and the rollout of the campaigns’, she said. ‘And on the economic measures taken by governments in response to health requirements.’

Although ‘[u]ncertainties are indeed multiplying’, she said, ‘preserving a degree of optimism’ is possible if one remembers the myriad open questions last September, she said. ‘All of these major uncertainties have now been resolved, notably the most important one of all – the availability of reliable vaccines … That’s a new situation and it’s certainly a reason to be optimistic.’

The unintended consequences of loose monetary policy had not yet led to ‘anything that gives us cause for concern’, Lagarde said, though with respect to property prices she noted ‘signs of overvaluations in some of the euro area’s major cities’.

It is nonetheless ‘vital’ that the ECB continue to support lending, she said, appearing to indicate that any problems arising from this would effectively iron themselves out once the collective dedication to growth, competition and innovation ushered in the phase when ‘the natural selection of companies will set in.’

The end of the pandemic will leave European policymakers with ‘a tricky situation on our hands’, she said, stressing the need to avoid the sudden withdrawal of support. ‘Instead, we need to offer flexible support to our economies, and then reduce this support gradually as and when the pandemic subsides, and the recovery takes hold’, she explained.

Very high French quarterly growth in the third quarter of 2020 illustrates European economic resilience, she suggested. ‘There is no doubt’ of countries’ ability to repay the debt incurred because of the crisis, she said.

Lagarde manifested some annoyance at the latest effort to get the ECB to cancel the sovereign debt on its books, an idea she called ‘inconceivable’ and a rejection of ‘a fundamental pillar of the common framework underpinning the euro.’

‘Rather than expending so much energy asking for debt to be cancelled, it would be much more worthwhile to focus instead on how this debt should be used, on how public funds will be allocated, on which sectors we should invest in for the future’, she said.